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Pharma: Looking to settle - Views on News from Equitymaster
 
 
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  • Nov 13, 2007

    Pharma: Looking to settle

    Since CY05, when generic companies worldwide were rocked on their heels by the substantial price erosion that they faced on their base business, the pricing pressure has not shown significant signs of receding. That said, the pricing pressure is now more brutal on new molecules losing patents than the base business, where prices have more or less stabilised. Thus, to counter these pressures global generic companies including Indian companies are focusing on niche product opportunities, which include challenging patents (Para IV filings) and products in therapeutic areas where there is lesser competition such as biologics, oncology, controlled substances and the like.

    As far as Para IV filings go, it is getting increasingly difficult for generic companies to secure that lucrative 180-exclusivity window while the legal costs are mounting. Hence, of late the focus has shifted to settling the patent lawsuits outside the court. In this article, we shall examine some of the positives and the challenges that this strategy involves.

    The positives...
    Revenue potential: The biggest positive that can accrue to the challenging company by settling the patent suit outside the court is the certainty with respect to the exclusivity period. While the launch of the generic drug will get delayed, the challenging company, nevertheless, gets the opportunity to launch its generic version a few months before the scheduled patent expiry with no other generic company present. This enables the challenging company to generate substantial revenues and profits with an element of certainty attached to it. Patent settlements are also beneficial to generic players in cases where the revenue potential is considerably lesser due to many players vying for a slice of the drug's revenues.

    Mitigating risks: On an average, patent challenges entail sizeable legal costs with no clear visibility in terms of revenues. Plus there is tremendous uncertainty associated with the same. Hence, out-of-court settlements mean that pending lawsuits get dropped obviating the need to incur more legal expenses. Besides this, the certainty of revenues from a particular drug gets more pronounced and the costs associated with legal matters no longer eat into the generic company's profitability.

    The challenges...
    However, patent settlements are not without their share of challenges, some of which are enumerated below:

    Approval from the FTC: Patent settlements generally come under the purview of the Federal Trade Commission (FTC), which could curtail the agreement if it feels that the settlement is anti-competitive in nature. Besides this, settlement deals are likely to be regulated to a greater degree due to public interest and consumer pressure. For instance, consumer groups could file lawsuits against the settling parties if they feel that the agreement would lead to a considerable delay in generic launches. To put things in perspective, Sanofi-Aventis and BMS had reached a settlement deal with Apotex for the former's blockbuster drug 'Plavix', which got rejected by the FTC.

    Competition sets in: Obviously, while settlement deals enable the challenging company to enjoy exclusivity benefits, the same is short-term in nature as the period does not extend beyond six months, after which generic competition sets in and prices erode sharply. Also, one cannot take a call on which drugs the challenging company will settle its lawsuits outside court and hence uncertainty exists to that extent.

    To conclude...
    Of late, domestic companies such as Ranbaxy and Dr.Reddy's, which are pretty active on the Para IV filing front, have been aiming to settle patents to lend some semblance of certainty to their overall performance. This is given the fact that the generic markets of US and certain countries of Europe have become highly competitive in recent times. While Ranbaxy has settled cases related to drugs 'Valtrex', 'Cephalon' and the most recent one 'Flomax' with their respective innovator companies, Dr.Reddy's has been successful in settling for the drug 'Imitrex'. Thus, settling a patent challenge suit is a smart strategy if the risk-reward ratio is skewed towards the former. As mentioned earlier, this particularly reduces the risk of incurring additional legal costs, which would otherwise have dented the profitability of companies.

     

     

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